Most experts agree that health maintenance organizations (HMOs) reduce health care utilization and costs for their enrollees. However, it is not clear that these savings are reflected in lower health plan premiums in firms that offer HMOs. Many firms are skeptical that offering an HMO will save money for them and their employees. The specific aim of this proposal is to determine if HMOs reduce premiums in employment-based health plans. This question will be answered by analyzing a survey of Minnesota employers, conducted in 1985. About 3800 employers were surveyed, using a random sampling procedure stratified by firm size. About 33 percent of the surveyed firms responded. This represents a better response rate than comparable surveys. Among the respondents, 1090 firms offer health insurance and 315 offer multiple health plans. The methodology will use recent developments in the theory of "selection bias" to adjust health plan premiums for the effects of unobserved variables related to offering an HMO. Specifically, a probit equation will be estimated to predict whether a firm offers and HMO. A selection term will be constructed from the probit equation and used, along with other variables, to predict HMO premiums and market share. The sample for estimating the HMO premium and market share equations will be those firms that offer HMOs. Separate FFS premium equations will be estimated for the firms that do and do not offer HMOs. Economic theory suggests that the FFS premium should be higher if the firm offers an HMO, other things equal. This theoretical prediction will be tested by including an instrumental variable for HMO market share in the FFS premium equation, if the firms offers an HMO. HMOs reduce average premiums in employment-based health plans if the FFS plan premium in a randomly-selected firm that offers only a FFS plan is greater than the weighted average premium in a similar firm that also offers and HMO. This hypothesis will be tested for different types of firms and under different assumed health plan benefit provisions.